Consumer Products Industry Grows As Consumer Spending Increases

Strong economic growth in the U.S. and globally has resulted in rising wages, greater hours worked, and plentiful jobs. These factors may partly explain the falling U.S. savings rate and thus greater rate of consumption by consumers.

Among 60 consumer-products firms monitored and forecasted by various equities analysts, projections for Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA) are expected to grow strongly during the first half of 2018.

Consumption spending by Americans rose 2.8% for the year ending February 2018, according to the Bureau of Economic Analysis. The latest available data on wages, overtime and employment all indicate that in 2017 and the initial months of 2018, workers on average experienced increasing incomes. Simultaneously, the U.S. Personal Savings Rate decreased from 3.6% during the fourth quarter of 2016 to 2.6% in the last quarter of 2017. This is important because income not deferred to savings is assumed to be spent in the present. For reference, the average savings rate since 2007 has been 5.3%, and 8.5% since 1947.

Strong consumer-confidence survey results likely explain why consumers have been spending more and saving less. According to the Conference Board’s survey results, respondents’ outlook on their present situation—measuring current business and employment conditions—are more positive now than at any time since 2000, including the period just prior to the Great Recession of 2008. Similarly, the Board’s survey of expectations—measuring expectations for six-months from now—are also at highs last recorded in the late 1990s and early 2000s, and above levels experienced prior to the Great Recession. Gardner Intelligence notes that since the start of 2017, the current-situation index has increased faster than the more forward-looking expectations index.

Increases in wage and hours worked, combined with a reduced savings rate during 2017, set the backdrop for strong 2017 revenue growth of 5.2% among nearly 60 publicly traded consumer products firms tracked by equity analysts on Wall Street. Wall Street revenue projections for these same firms in 2018 and 2019 are 4.7% and 3.5% respectively. Gardner Intelligence believes that the lower projections of revenue growth will be a result of savings rates increasing to a point closer to their long-run averages.

Conversely, should wages and work-hours show even stronger than anticipated advances in 2018 and 2019, revenue projections could be upwardly revised. Strong revenue and earnings projections for the consumer-products industry, coupled with solid 2017 growth, may explain why capital expenditure levels among sector firms during 2017 were 6.6% higher than the same period a year ago.

Comparable capital expenditure growth in 2016 and 2015 was 2.8% and -1.1% respectively. It also bodes well for processors supplying these firms with parts and components.

ABOUT THE AUTHOR: Michael Guckes is the chief economist for Gardner Business Intelligence, a division of Gardner Business Media (Cincinnati, OH US). He has performed economic analysis, modeling and forecasting work for nearly 20 years among a wide range of industries. Michael received his BA in political science and economics from Kenyon College and his MBA from The Ohio State University. mguckes@gardnerweb.com